The North American shale revolution has created new multibillion-dollar industries overnight. One of those industries is selling sand for hydraulic fracturing. This business was virtually nonexistent a decade ago, but now it supplies more than 100 million tons of sand annually. A business growing this fast is bound to attract investors. The longer these businesses are in the public eye, though, the clearer it has become that this is a difficult industry to predict.

One takeaway lesson thus far is that for a company to stand out in this industry, it needs to be more than just a supplier of sand. Companies with ancillary services are separating themselves as the suppliers of choice. One company that has benefited immensely from this trend is U.S. Silica Holdings (NYSE:SLCA). Thanks to its logistics and last-mile services, it has been able to lock in customers with long-term supply contracts that help smooth out the wild swings in demand and prices common in this industry.

U.S. Silica is so confident in its logistics services that it is upping the offer for its customers. If this recent announcement gets any traction, the company could separate itself from the pack in this industry. Here's what U.S. Silica's management said on its most recent conference call, and what it could mean for the company.

Excavator dumping sand.

Image source: Getty Images.

Sand served hot and fresh, or your money back

Supplying sand isn't that hard of a job. It's a commodity product that sells for low costs per ton and doesn't take a whole lot of processing. The challenge for frack sand suppliers is getting that sand to a well. Transportation and logistics are some of the most expensive parts of the whole process. 

Rather than sit on the sidelines and let some third party take care of logistics, U.S. Silica took the initiative by acquiring a logistics business known as SandBox, which provides last-mile delivery service of sand with specialized containers that drastically reduce loading and unloading times. The service has been wildly popular among customers -- so much so that CEO Bryan Shinn announced the company was improving its offer to customers with on-time delivery guarantees:

[Our customers] also generally prefer that the sand provider manages both sand and logistics all the way to the blender, which gives rise to the fourth dynamic that's currently influenced our industry, and that's the importance of having a leading last mile sand logistics solution to serve operators who want to self-source their own sand. We believe that we have the best solution in the market today with SandBox, and we're seeing more customers recognize this as well. We have a very strong pipeline of new work with recent contract awards from several operators from multiple crews planning to start in Q4 and Q1.

We're also happy to announce an expansion of our commercial offering for delivered sand to include performance-based pricing. Our track record gives us confidence that we can deliver on spec and on time, and we're the only sand company today offering to pay customers when they wait on our proppant in exchange for bonuses when they do not. 

The interesting component of this statement is U.S. Silica's ability to add Sandbox logistics crews in this quarter and the next one. With oil prices plunging and pipelines filled to the brim with crude oil, many producers have backed away from completing wells for the rest of the year. So, to hear that U.S. Silica is still adding crews to the field in the midst of a slowdown is encouraging.

One thing Shinn also pointed to was signing more customers to long-term supply contracts. In September, it announced that Pioneer Natural Resources (NYSE:PXD) signed a 15-year supply contract where it will take 2 million tons annually from one of U.S. Silica's sand mines in the Permian Basin. According to Pioneer, the proximity of the mine to its Permian operations will cut its supply costs in half because of reduced transportation and logistics costs. In exchange, U.S. Silica gets an anchor customer that guarantees revenue and decent margins out of this new mine.

Shinn has said that the company is in talks with other producers for similar supply deals, which is something investors should watch for in the coming quarters.

SLCA Chart

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Superior business, but underperforming stock

U.S. Silica has proven to be one of the best in the frack sand business. This deal with Pioneer Natural Resources and a new program to guarantee on-time deliveries is a clear sign that the company can do things no other sand supplier can. Unfortunately, the frack sand business is an incredibly tough one for generating long-term returns. Shale drilling can ramp up and wind down so fast that it's near impossible to predict supply. This means companies are caught in a perpetual loop of either having too much supply, or spending lots of money on new mines and crimping profits.

The upside for investors is that U.S. Silica is starting to figure out how to build a business that can better handle the cyclical nature of this industry. Long-term supply contracts coupled with logistics services will help protect revenue and margins. Also, management is diversifying its business by expanding its industrial and specialty products segment. 

Today, shares of U.S. Silica trade at a price lower than its IPO price, and below the bottom of the oil crash in 2016. As bad as the recent pullback has been, it's nowhere near as bad as what happened in 2016. With a better business model and a dirt-cheap stock price, investors should take a hard look at U.S. Silica's stock. 

Tyler Crowe owns shares of U.S. Silica Holdings. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.